Thursday, June 27th, 2013

Occasional Urbanophile contributor Robert Munson has talked about how Chicago Mayor Richard M. Daley was among the first to recognize that there was a “taxpayer strike” in America. That is, given the breakdown in the social contract in our cities, taxpayers were increasingly unwilling to pour money down a rat hole.

Localities have also been in a fiscal vice as their tax receipts have collapsed thanks to the Great Recession and especially the decline in housing values, while at the same time the chickens are coming home to roost from the accumulated unfunded liabilities that had been racked up from sweetheart pension deals and the like.

And state and federal retrenchment have cut into municipal budgets. Aid to municipalities is easy to cut. Also, it’s easy for states to make municipalities bear the brunt of tax caps and other disempowerment items since living with them is Somebody Else’s Problem for state office holders. And most states radically under-empowered local governments to begin with.

Combine these and there’s little room to maneuver for many cities and mayors. They are hemmed in on all sides. So what do they do? Unsurprisingly, they’ve increasingly turned to gimmicks, especially in bigger cities that have the talent firepower to dream them up.

Exhibit A is parking meter lease in Chicago. It generated $1.2 billion in “free money” for Mayor Daley to use to paper over deficits, but at a huge long term cost. We’ve seen all sorts of other “public-private partnership” type deals that accomplish similar things. Many of these are not per se problematic – I’m a fan of privatization done right, for example – but the details can be troublesome when you examine them.

One common complaint I hear in places like Chicago and Indy is the abuse of Tax Increment Financing (TIF). Without a doubt TIF has been abused in a number of cases. But what critics fail to take into account is that TIF is one of the few tools left in the civic toolbox that can actually raise real money.

Let’s say we are all opposed to gimmicky privatization deals and TIF to raise money. Now let’s ask the question: how are our cities supposed to pay to rebuild their obsolete infrastructure like pothole-ridden streets that, even if they were already pristine, don’t meet modern 21st century demands? This is a real liability of the city, accrued over the years as previous generations failed to keep up with maintenance and such. Absent gimmicks, how is this supposed to be funded? And if the answer is don’t fund it, then how is a completely run down, dilapidated city with creaky services supposed to retain choice consumers who can easily pull up stakes and move to a new suburb or other part of the country that doesn’t have these problems? It’s easy to criticize, but solutions are needed.

Munson thinks that we need to have accountability reforms so that the public will be convinced to open their wallets and invest. I agree this is critical. I personally have no desire to pour any more of my money into the local treasury until I can see that I’m going to get some return on it. And there’s evidence that the public will spend if you can demonstrate that. Capital bonds and actual tax increases for things like schools, transit systems, stadiums, and even cultural facilities have frequently passed across America when there’s assurance that the money is ring-fenced. When people know that they can vote for a tax and get something tangible for it, even something as dubious as a stadium, they can be convinced to vote for it. But more money for fewer and worse services is a loser every time.

The problem is that the state controls the fiscal levers. Therefore there’s no guarantee that even if a city got its house in order, it would even be permitted to ask its residents for more money. Also, too many local leaders are beholden to special interests and so are unlikely candidates to deliver reform anyway. Paddy Bauler eloquently summed up this mindset when he famously said, “Chicago ain’t ready for reform.” Sadly, this remains true in all too many places.

So while the use of gimmicks may be distasteful (and even destructive in the long term at times), we should expect more of it since the incentives are all aligned to produce this outcome. Those cities that do manage to reform, and get state support for the type of legal framework the need to operate (as called for in The Metropolitan Revolution) will be the ones that end up with long term success.

22 Responses to “The Hall of Gimmicks”

Aaron, even you are exhibiting a little of the “if I don’t use it, I don’t want to pay for it” mentality that undermines the commonwealth.

How many people actually pay attention to, and understand, the actual cost of police and fire and ambulance systems? Of street maintenance and trash collection? These are base-level municipal services. (Okay…you and I probably do think about these things, but most people don’t.)

We don’t pay for public safety “protection”, we pay for “reaction time”: how long from the 911 call until a cop, fire truck, or ambulance arrives. How do you value that? Frankly, most of us value it at zero until we need it. The “reductio ad absurdum” argument would be to bill the service as used, on an average-cost basis…but who would be willing to pay then?

How do you control costs for X level of any municipal service? Delivery cost is largely current salaries and health benefits, plus pensions…factors that markets or contracts usually escalate every year. (Sidelight: I argued years ago that Steve Goldsmith’s main goal in “privatization” of city services was to get benefits and pensions off the public dime. He was probably 15-20 years ahead of his time.)

Even a low level of service costs more every year. So the real knock on TIF is that it freezes tax collection for a given area and doesn’t consider the increase in base costs, or actual increases in require municipal services when the area is redeveloped at higher density or intensity of use.

That said…I am generally supportive of TIF for the same reason as you. TIF is often the most appropriate tool a city has to finance redevelopment: cities can bond capex now, against a relatively certain revenue stream, and effectively bet that they will capture a significant tail of the revenue stream plus spinoff effects sooner. (In Indiana, it is also possible to fine-tune the revenue splits going forward and I think we will see more of that.)

Chris, I don’t agree with your underlying premise, which is that costs must always go up. When I worked in corporate America, we had to lower our unit costs every year, no questions asked. Hit the target or you are gone. Look at the vast efficiency improvements in virtually every aspect of economic production in the private sector. (Health care and education, two areas where the consumer of the service feels very little economic impact up front from what they are buying, are two notable exceptions).

One big problem is that our leaders (and too many citizens) incorrectly perceive the high cost of government as one of its benefits (i.e, the jobs it creates). For some reason no one ever applies the same criteria to things they buy out of pocket.

As soon as metro interests outside of core municipalities see how they are hurt by starving the infrastructure of the core cities they surround, they’ll be open to new ways to fund it. These problems have developed because people could take a free ride on center city infrastructure. When they see that they can’t anymore, they’ll pay up one way or another. In some places it will be regional government. In others, sharing of specific services, such as water, roads, etc, and in others ring-fenced user fees. Either this will be figured out or many American metros have no future.

Indy is besieged by TIFs, each funneling a portion of tax revenue into whatever project was undertaken. If I choose to shop in the fancy new TIF-funded district, that means I won’t shop at another locale. Unless TIFs increase total tax revenue, which seems tenuous. TIFs are more associated with graft than growth.

States have all the revenue they need, if they would simply stop wasting it. Here in Indy we never got close to oaying off the old football stadium before tearing it down to build a new one. Neither one improved the city in any way; a rational person from elsewhere would look at what we spend money on and think we’ve lost our minds.

A parallel would be the need for money for research into disease treatment…how about stopping the idiotic perpetual war machine first ?

Aaron, at the end of the day, efficiency equals “remove labor cost” in services just as it does in manufacturing.

There just aren’t good ways to remove labor from most municipal services, or in-person (hospital) healthcare, or in-person education.

I’m back to emergency services coverage: until we can teleport emergency responders, response times will be governed by the laws of physics and the hazards of local roads. The only way to get a higher LOS for police or fire response is to have more cops and build more fire stations.

Likewise medical care. A hospital sits and waits for patients, and eats money while doing so.

Likewise trash collection. A route must be serviced with a truck and staff whether the residents put out 10 tons or 20 tons. Even if they separate out recyclables.

Likewise snow plowing. It’s all physics and LOS.

There just aren’t efficiencies in those basic services. Costs definitely go up for higher LOS. But people won’t accept lower LOS, so there is inertia and costs will rise a little every year even maintaining a set LOS.

The problem I have with TIF financing schemes is that while they do raise money for the TIF district, the net effect tends to be a skewing of the revenues generated for the broader governmental units, ie schools, local govt, etc. Mind you, I am not a big fan of pouring more money down the rathole that the public school system has become, but the truth is that over time, the TIF districts do take away a lot of money from these other governmental units. If employed to the extent that they have been employed in Indy, the TIF’s end up starving the “traditional” units of government. While some may think this is a good move, I am troubled by the fact that no one is looking at the big picture of govt revenues.

What Chris said. In parts of the private economy where it’s hard to reduce labor cost, efficiency improvements are small and sometimes even negative if you have to pay workers more to compete with sectors where efficiency is improving. For examples, grocery stores aren’t getting more efficient, and neither is private-sector construction. The cost of building a new building is actually growing a little faster than inflation.

It actually makes a lot of sense for the government to have less efficiency growth than the private sector. Fast innovation of the type we see in technology sectors is usually impossible to do in the public sector. I think it’s you who explained to me that it’s very hard to do this even in a preexisting corporation, unless it creates a subdivision dedicated to new technology and protects it from the rest of the organizational structure until it becomes big enough to be a major profit center. So it makes sense for the government to privatize (or fail to nationalize) services that depend on rapid technology growth, for example universal computer ownership, while keeping in public hands services where the innovation advantage of markets is reduced or nonexistent.

Government isn’t like a string quartet where you always need four musicians. There’s a vast scope to reduce the amount of labor needed for the provision of public services. Our transit systems are near worst in class on both capital and operating costs as near as I can tell. And yes, Chris, this includes fire protection where it’s well known that many urban departments are bloated thanks to labor contracts. Try to close a firehouse and see how that goes.

Our productivity problems result from treating government too often as a provider of jobs to public sector employees, not services to the actual public. Precious few private employers provide the kid of job security public employees have, provide defined benefit pensions, keep 100% of the jobs and harmonize salaries to the high water mark in mergers, etc. There are also few people in government with a real incentive to control costs or improve service levels. This may in fact be difficult to change, but it’s not a fact of nature.

I agree about transit, but how much scope is there on other matters? With K-12 education, for example, US costs are relatively in line with costs in other developed countries. I have not done a comparative cost of water projects, but the large cost overruns that constantly plague transportation projects seem not to be present for projects like Water Tunnel 3.

Interactions are complex. A number of government programs deal with poverty and blight, so “gentrification” or actual better economic opportunities for the poor, might reduce those costs without any efficiency gains.

There are clearly things that can be done, however.

Emergency services, particularly fire and EMS, are a big one. Fire departments are well known to be overstaffed. We also clearly vastly over-dispatch emergency vehicles in the US. Go to another first world city and count how many fire trucks you see on runs versus the US. It’s ridiculous.

We clearly need to modernize personnel practices to be in line with reality and the marketplace. When private sector business involved lifetime jobs, perhaps government could as well, but with our dynamic economy, we need to have a more dynamic public sector workforce. This means pay in line with market (which actually means cash pay goes up in a lot of places), defined contribution pensions you can take with you when you move on, and the ability to hire, fire, and promote on merit. Among other things this reduces accrued liabilities that kill us financially down the road.

Next we need to identify which services can be operated on a “managed services” basis and implement product costing to understand the real unit costs. This lets you both have a conversation about the cost/service tradeoff. Then there should be mandates for unit costs declines each year management is held accountable to (potentially relieved if there is population or total production loss, but clearly if you are growing your unit count, your unit cost should be decline because of scale effect. Surely at least some costs should be semi-fixed). We can also make sure these are fully cost recovered. Permitting is a classic example here. (I might also mandate continuous service level improvements).

Also, service definitions need to be rethought. Indy’s street designs are circa-1975. That would be like Apple still trying to push the Apple II in the marketplace. No amount of money needs to be spend building more of that.

Speaking of infrastructure, costs can be reduced by judicious use of local vs. federal funding.

I’d like to see the endowment/conservancy model used more frequently to provide dedicated funding for operations and maintenance over time. Possibly some of this should be put into the initial bond so that it’s guaranteed to be funded going forward and you aren’t accruing all these liabilities.

There’s evidence that services can be reinvented. Rhode Island’s DMV was notoriously awful (as it is in many states). They redid their entire system to be computerized with electronic workflow, etc. and it’s much better. Indiana got rave reviews on its system as well. I’m not sure if the actual cost went down, csat soared and the cost of large numbers of people siting around for hours waiting to get their licenses certainly was reduced.

Why doesn’t the idea of limiting Sovereign Immunity come up?
It now seems like the U.S. gives broader protection to public employees from liability for their actions and decisions than many countries.

Say Pension administrators, union officials and politicians could be held liable for the gross understatement of liabilities? The government has spread this cancer deeper into the private sector by protecting too big to fail corporate officers from criminal liability.

Hah, yes! Imagine a Sarbanes-Oxley type law where top public officials and administrators had to sign off on pension books and other key matters of administration under oath each year. That might do wonders for integrity in data reporting.

Police and Fire Retirement System & General Retirement system issue statement saying General Fund 1s 77 percent funded, with $2 billion in assets, and the Police and Fire fund is 96 percent funded, with $3.1 billion in assets.

Meanwhile the actuary firm that The Detroit Emergency Manger uses as a consultant,- “Seattle-based Milliman. The firm said “very rough preliminary guesstimates” show the police and fire pension fund was only 50 percent funded for the fiscal year ended June 30, 2010, and the general services pension fund was funded at only 32 percent.”

I know these are about assumptions about life expectancy; investment returns and sometimes valuations of illiquid assets but a gap like that means that someone is lying or totally negligent.

I admit ignorance about issues surrounding police and firefighting costs.

However, the problem with the “cut preexisting pensions” strategy of improving local finances is that there’s an implicit, and in some cases explicit, commitment. The problem with acting like a corporate raider who breaks implicit commitments is that the city government can’t just move on to the next target. Since it’s going to stay there, it loses a lot from breaking trust.

For example, a big chunk of the American infrastructure construction cost problem seems to come from trying to substitute regulations for trust. In New York the government has no discretion and must pick the lowest bid, so it writes over-exacting specs that nobody who can get private-sector work bothers with. A relationship based on some degree of trust, in which the city exercises oversight over conflicts of interest but lets contractors make small changes offers more flexibility and reduces costs.

Larry Littlefield, a New York commenter who’s very big on debt issues, explained that in the 1970s, it was possible to break implied agreements with teachers because inflation eroded the value of their pensions. This is no longer possible: the UFT learned and negotiated cost-of-living adjustments afterward. With defined-contribution pensions, something similar is going to happen, once workers realize that to have enough to retire, they need about 40 cents in employer pension contribution per dollar they make in salary.

And the political incentives are against anything that controls costs long-term (e.g. in transportation and health care). That’s why thinktanks on the center and right talk so much about pensions: it’s a great short-term fix and is much more noticeable than long-term bending of cost curves.

I’m not sure what you mean by cutting pre-existing pensions. Yes, there are existing pensioners who are going to see haircuts thanks to bankruptcy or de facto bankruptcy (like Detroit). This is what would happen to any creditor.

But I’m not aware of any serious pension reform advocate suggesting that benefits already earned be reduced. I certainly don’t. Going forward, however, is a very different matter.

Trust properly so called is symmetrical. The system we have today is not symmetrical. It’s a one way ratchet. Public employee unions are free to make huge campaign contributions to the point where they practically own some officials, lobby, go on strike etc, to continually sweeten their deal. On the other hand, reducing anything they’ve gotten on a go-forward basis is portrayed as immoral. It’s like heads I win, tails you lose. This is not most people’s definition of a trusted relationship.

Another assumption: “have enough to retire.” The idea that we can all retire at age 65 (or say age 50 in some public sector areas) and not work for the rest of our lives is another one that may not stand up to fiscal reality. This affects me so I’m likely to experience the pain myself. Realistically, I’m probably going to have to work much longer than my parents did. Working longer is certainly very feasible as well, given that we’re healthier today and most of us no longer do backbreaking labor of the type that was common when Social Security was rolled out.

I fully think public sector employees should be well-compensated. But it should be compensation that’s financed up front, and portable between employers, and not based on an expectation of lifetime employment. The transition to such a system obviously needs to be managed with some amount of care.

This essay contains a serious flaw: “Tax Increment Financing (TIF). Without a doubt TIF has been abused in a number of cases. But what critics fail to take into account is that TIF is one of the few tools left in the civic toolbox that can actually raise real money.”

This is obviously wrong: TIFs are Taxes. It’s in the name. They are not a separate tool for raising real money, but the opposite: a tool for spending money NOT on potholes and infrastructure and essential services people want, but diveritng it away from the regular budget and democratic process. Taxes go up, but those increases are, by design, denied to those creaky services which are driving people away. The TIF is almost inherently abusive, as anything allows people to increase real taxes but pretend they don’t exist on the real budget tends to get spent in unreal ways. For TIFs to work properly as something other than an unaccountable slush fund, they’d have to be subject to the same rules and oversight as normal budgets with the only difference being they have to be spent where they were raised. This is what TIFs pretend to be when proposed, but, in Illinois at least, they aren’t designed that way in real life and I’d argue given human nature they never will be.

Another flaw is mentioning stadiums in the same breath as schools and transit systems, Contrary to the abstract generalizations here, cities have never not spent on big flashy projects which end up serving a wealthy fraction of citizenry and rarely return as much benefit as they cost. In fact these things always come first to the point of neglecting less visible necessities which are actually far more vital for keeping residents. Chicago is a real life example of this – every stadium has been rebuilt or maintained in part or whole on the public dime, huge largely private developments like Block 37 are subsidized but people still leave because the suburbs put things everyone wants first. Even our public library is like this: hundreds of millions spent on new buildings but no money to operate them – something people predicted even when times were good.

This is the problem with theoretical policy discussions – they tend to be unreal. The models and ideas do not allow for the negative side of human nature, do not acknowledge injustice. And it turns out, if these things aren’t incorporated, it doesn’t work. Consider how muncipal bonds, grants and fundraising tends to be project rather than operations driven, meaning that money is primairly defined by constructing new stuff and expanding while maintenance of what exists feeds off the margins. Which is not sustainable.

The great depression of 2008 was fueled in large part by Wall Street essentially looting pension funds and municpal savings by selling them toxic investments. It wasn’t just that revenues went down, the money which did exist evaporated via malfesance and mismanagement. It may be impossible to fully correct this, but treating pensions as just an unfunded mandate is unfair to those who spent their lives keeping cities running in exchange for these benefits.

@Wondering, you won’t get any argument from me that stadiums are a waste of money.

As for TIF, it enables municipal officials to capture 100% of the incremental tax revenue, not just their typical share of it. Hence from their perspective it legitimately is a revenue raising tool. Chicago has broad authority to raise taxes, but many other cities around the country don’t. (Non-home rule municipalities in Illinois are tax capped, for example). This causes them to latch onto gimmicks.

I think you miss my point. I’m not suggesting these are good thing, just that the incentives are aligned to produce them.

I guess the elephant in the room is the IRS. With so much of our overall tax burden coming from the feds, it’s not possible for states or municipalities to levy much more for their own use without the populace crying uncle, hence the need for games/gimmicks.

As it stands, states and municipalities have to essentially beg the federal government to get their tax money back. This results in projects that are then beholden to all sorts of strings and regulations, leading to a very dumb and in many cases inappropriate system (things like municipal zoning, street and highway standards, etc.).

If most taxes were levied at the local or state level, making the feds beg for funds to do whatever warmongering or other things they need to do, then at least local levels of government wouldn’t be so strapped for resources. Might there be other problems? I have no doubt, but the system we have certainly isn’t producing very good results.

Aaron, Jeffrey, you’re both implicitly assuming that certain tax levels are impossible or intolerable. In fact, they are neither. Well-funded pensions and social services cost a majority of one’s market income in taxes, leading to income tax rates higher than 50% in some countries (often much higher than 50%). What’s unsustainable isn’t letting factory workers and cooks and retail workers retire at 65, but keeping the marginal income tax in the 30s or low 40s.

There is an implicit promise to give everyone pensions, even young people. I want to be able to retire one day. If I end up at a well-funded private school then I’ll be fine, but at public universities, especially in states that aren’t very liberal, it’s dodgy. The state can choose to eliminate a department, which overrides tenure protections, and this also zeros the pension benefits promised to the faculty. Any cut to pensions and any rise in retirement age will just erode whatever trust is left.

Not at all Alon. I do agree that tax rates are dangerously low for the type of services people want. Aaron makes the point though that people aren’t willing to pay those taxes when they don’t feel they get anything back for them. Yes it’s a very dangerous mindset, because then you end up with situations like retirement communities that refuse to pay for schools and such. So it’s not a case of impossible or intolerable, just politically unpalatable.

We had a period of unbridled prosperity in this country in the 50s and 60s that also corresponded with very high tax rates. Nevertheless, many of the societal advances made during that time have been or are in the process of being systematically rolled back. Don’t underestimate the capacity of the populace to vote against their own and society’s best interests.

Alon, your definition of trust seems to be particularly one sided with the focus on benefits. Other people might have a different definition. For example, I might take the flip side of that: I want to trust that my tax rate is constant in perpetuity and that just as with the government employee, I’d like to be able to make my life plans with the certainty of knowing how much of my money the government is going to take. The government increasing my taxes without limit with no predictability is as much a breach a breach of trust since it functionally the same thing as cutting benefits. The only question is whose ox gets gored. Let us also not forget that it is the proposed very recipients of these benefits (I’m talking society at large here) who conveniently failed to tax themselves sufficiently to fund them and racked up massive debts/unfunded liabilities they plan to hand to the next generation and make the argument that they must be paid under the guise of “trust.” Oh, and they continue to try to obtain post-hoc benefits that were never part of their deal and which they never paid anything for during their working years (like GWB’s Medicare prescription drug benefit). That’s not trust, it’s a scam.

But nobody was ever promised, nor given, a constant tax rate. Taxes change all the time. In the US and in most other developed countries, government pensions have been around for a lot longer than Reagan-era tax rates. It’s impossible to both have livable pensions and low tax rates, but cutting pensions hurts the people who need them, i.e. the bottom half to two thirds of the income distribution, whereas raising taxes hurts people who can afford to pay. It’s telling that zero percent of the people who are arguing for cutting public-sector pensions say anything about raising Social Security taxes and benefits to levels that wouldn’t require middle-class workers to have extra benefits.

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